The Organization of the Petroleum Exporting Countries (OPEC) and its oil producing allies led by Russia, a group known as OPEC+, reportedly agreed on July 15 to increase oil production by about 1.6 million starting in August as the energy market appears to be recovering from the coronavirus pandemic. OPEC+ reduced production in April by a total of about 9.7 million barrels per day.
“It’s a bit of compromise,” Alexei Kokin, a senior oil and gas analyst at UralSib Financial Corp in Moscow, told New Europe by phone on July 16. “They’re doing this one month late, one month after the original date. Initially they thought they would be able to do that starting from the first of July. So, they basically waited for another month until they eased the quotas and it looks like the quotas won’t be raised by 2 million barrels per day but a bit less than that,” Kokin said, explaining that countries like Iraq, Nigeria, Angola and Kazakhstan that overproduced in May and June will have to underproduce in August so the increase effectively will be less than 2 million barrels per day.
He also pointed out that Saudi Arabia and its neighbours consume more crude oil in the summer. “Instead of fuel or gas, they burn crude oil to produce electricity in the summer. Usually consumption goes up, they have less oil available for export. As a result, they export less oil usually in July, August and September. So, all in all this means the impact of this increase should be relatively mild on the market in general,” the UralSib energy expert said. “And if things go bad, if COVID really returns in full force in September at least in theory they could just roll back these increases and go back to where they are now basically. They could say, ‘Okay, we will move back to the quota that existed in July,’” Kokin adding that it’s always easier to cut from a high point.
He said the decision on July 15 to increase oil production by about 1.6 million starting in August is good news for Russian oil producers, which were not happy with cuts agreed by OPEC and Russia. “They were bothered. Rosneft perhaps more than others because it had certain contractual obligations with China,” Kokin said.
He explained that there is fixed amount Russian state oil giant Rosneft ships to China every month which leaves less for other markets. “If you have a fixed amount in one direction and your production goes down normally the percentage decline in exports is greater than the percentage decline in production,” Kokin said. “And also bear in mind, internal consumption in Russia has increased in April and May as Russia is gradually returning to normal. So, again this means there is much less available for exports in percentage terms. So, Urals exports dropped by more than 15 percent, I think it will come as a relief because Urals exports might go up 20% when Russia increases production and that’s considerable,” he added.
US President Donald J. Trump hailed April’s oil production cut as a way to protect the US shale oil industry. But the longer OPEC maintains its oil production cuts in order to boost prices, the more it encourages competition from US shale producers. Low oil prices forced many US shale producers into bankruptcy or to take their rigs offline but as prices rise they are likely to restart production.
Kokin said US shale is a wild card. “We’re trying to understand how fast American production will start growing if WTI (West Texas Intermediate) remains slightly above 40 dollars per barrel,” he said. “Some people say that wells that were temporarily stopped will come back on stream and even before there is a turnaround in drilling, there will be an increase in production because those wells will be producing again. But I say let’s wait and see and we will probably know in a few weeks from now. But then again OPEC now has more options. If Americans kind of come back then OPEC could say, ‘Okay let’s keep this quota for a longer time,’” Kokin said, adding that there is a bit of flexibility.
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